Question

Because construction loans seldom cover more than 70 to 80 percent of land and construction costs, and because the required return on equity financing is much higher than on debt, developers sometimes seek _______ financing.

Answer 1

Developers may seek mezzanine financing when construction loans and equity financing are not sufficient or are too costly. Mezzanine financing provides a blend of debt and equity, which could include the option to convert to an equity stake in the company.

Step-by-step explanation:

Developers who find that construction loans do not cover the full range of land and construction costs, and are facing higher rates of return demands from equity financing, may look for alternative forms of financing. They often seek mezzanine financing, which is a hybrid form of capital that includes elements of both debt and equity financing.

This type of financing is particularly useful because it often provides the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full.

Additional ways for firms to raise financial capital to pay for large capital projects include early-stage investors, reinvesting profits, borrowing through banks or bonds, and selling stock. The choice of financing source will influence both the immediate cost of borrowing as well as the long-term financial structure of the company.

Understanding these options allows a firm to strategically determine the most beneficial path for securing the necessary funds for growth and expansion.